The following information relates to the Atlas Division of Global Enterprises: $$\begin{array} { l l }
\text { Interest rate on debt capital } & 8 \% \
\text { Cost of equity capital } & 12 \% \
\text { Market value of debt capital } & \$ 50 \text { million } \
\text { Market value of equity capital } & \$ 80 \text { million } \
\text { Income tax rate } & 30 \%
\end{array}$$ On the basis of this information, Atlas's weighted-average cost of capital is closest to:
A) 7.3%.
B) 8.3%.
C) 9.5%.
D) 10.8%.
E) None of the other answers are correct.

Question

The following information relates to the Atlas Division of Global Enterprises: $$\begin{array} { l l } 
\text { Interest rate on debt capital } & 8 \% \
\text { Cost of equity capital } & 12 \% \
\text { Market value of debt capital } & \$ 50 \text { million } \
\text { Market value of equity capital } & \$ 80 \text { million } \
\text { Income tax rate } & 30 \%
\end{array}$$ On the basis of this information, Atlas's weighted-average cost of capital is closest to:
A) 7.3%.
B) 8.3%.
C) 9.5%.
D) 10.8%.
E) None of the other answers are correct.

Quizplus · Accepted Answer

The WACC is calculated as: $(E/V) \times Re + (D/V) \times Rd \times (1 - Tc)$, where $E$ is equity, $D$ is debt, $V$ is total value (equity + debt), $Re$ is cost of equity, $Rd$ is cost of debt, and $Tc$ is tax rate. Substituting the values: $(80/130) \times 12\% + (50/130) \times 8\% \times (1 - 0.3) = 9.5\%$.

The Following Information Relates to the Atlas Division of Global